BP blinks: the oil giant has made an effort to free itself from the mess it caused with the Gulf of Mexico oil well explosion and leak on April 20. In a series of announcements this morning, it said it will suspend $US7.5 billion in dividends this year, will set up a $US20 billion fund to be run independently to pay the costs of the clean-up over the next four years. BP also said it plans to raise $US10 billion over the next year by cutting back on capital spending and selling some oil production assets. It will also set up a $US100 million compensation fund to pay oil drilling workers laid off in the Gulf as a result of the spill and government ban on drilling. The shares rose modestly, but the news reversed a down day on Wall Street as bad news from housing offset good news on production and wholesale inflation. Now BP has gone from “wicked British petroleum” to “co-operative BP”.
US watch: as expected, the ending of the home buyers tax credit in April sent new home starts and building permits down in May, but by far more than the market expected. The US government said building permits in May were an annual 574,000, down 5.9% from April, but 4.4% above the May 2009 estimate. Housing starts fell 10% from April, to an annual rate of 593,000. But that was still 7.8% above the May 2009 level. Can’t blame this on snowstorms. Starts were at a five-month low in May, the 10% decline was the biggest in 14 months and April’s housing starts were revised down to show a 3.9%, from the previously reported 5.8% rise. A real worry was the 17.2% slump in starts of single family homes. Thanks to the ending of the credit, that was the biggest fall in 18 years. Home completions fell 7.4% to a 687,000-unit annual rate. The inventory of total houses under construction fell 2.3% to a record low of just 475,000 units in May.
US watch 2: but no sign of deflation in the wholesale price index. It fell a seasonally adjusted 0.3% in May — the largest drop since February — thanks to falling energy and food costs. The core rate rose 0.2% once energy and food were excluded. That left the annual rate up 5.3%, with the core up 1.3%. Consumer prices tomorrow. But industrial production jumped 1.2% in May after April’s 0.7% rise, according to the monthly report from the Fed. That was the good news for the day. But US manufacturing must be getting lonely holding up the recovery all by itself, with help from the government stimulus spending.
The pain in Spain… oh, dear, what’s this? Spain, already stricken financially, now joins Australia in the unwelcome spot of having a zero after its name in the World Cup results tables. It only has one goal against its name, scored by Switzerland last night, we have four, thanks to those dazzling Germans. But Spain was one of the early favourites, we were favoured to be on the plane home early. So it was a gooooooaaaal for the Swiss (notorious protectors of bank secrecy, sort of), zilch for the high-priced Spanish team. Soccer can be a great leveller at times.
But what’s this …? Guess who’s coming to dinner in Madrid? Why it’s Captain Bailout, or International Monetary Fund head Dominique Strauss-Kahn, who’s due to drop in on Spain on Friday for talks on the economy with Prime Minister Jose Luis Rodriguez Zapatero. No agenda, no other clues, only soccer chit chat (His French team had a miserable draw) but it should be noted that Spain is Europe’s newest basket case, with its financial system on life support from the European Central Bank, which is pumping more than €85 billion a day into the banks. French and German banks have hundreds of billions of loans to Spain among the more $US700 billion lent by all banks in Europe. So plenty to talk about, especially with the IMF backstopping Europe’s half a trillion package with €250 billion in extras money. Let Spain win the cup, the prize money will be handy.
Spain needs help: yields on one-year Spanish government debt hit 2.45% this week compared to just 0.9% in April. Last night the premium to German bonds for 10-year Spanish government debt widened to an all-time high of 2.22%. Shades of Greece. But there is rising concern about the country and whether the EU’s €750 billion backstop will work. Francisco Gonzalez, chairman of BBVA, Spain’s second biggest bank, was quoted this week as confirming that “the majority of the Spanish companies and financial groups are shut out of the international capital markets”. According to media reports, the chairman said Spain’s external debt has reached €1.5 trillion, or 147% of GDP, and much of it short-term money. Of that debt, some €5600 billion falls due this year, Goncalez was quoted as saying. That’s a problem. According to JP Morgan, Spanish banks need to refinance €64 billion over the rest of this year. That will test market confidence.
Spain acts. Spain’s central bank said overnight it will release the results of stress tests conducted on the country’s banks to reassure the market the organisation can survive. Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, said the central bank had carried out the tests to verify that commercial banks, savings banks and co-operative lenders had enough capital available to support even difficult growth scenarios. “The bank intends to make public the results of these stress tests, showing estimated loan losses, the consequent capital requirements and the contribution of promised balance sheet reinforcements, so that the markets have a perfect understanding of the circumstances of the Spanish banking system,” he said. Now will Germany, France, Italy and the UK, for example, follow suit and release the results of tests they have done on their banks?
Tax watch: there have been lots of genuine criticisms of the proposed resource super tax, but there’s also been a lot of grandstanding aimed at spreading the impression that Australia is besieged by worried local and international investors. Tosh. We have had to endure claims about a capital strike, sovereign risk, damage to food prices, housing and jobs, and the way the debate is heading, to the loss by NSW in the State of Origin yesterday and the Socceroos’ lesson from Germany. Rumours of a possible settlement or deal on the resources tax saw Rio Tinto shares jump $1.92, or 2.7% to well over $71 yesterday. BHP Billiton was up 84 cents, or 2.2%, at $39.23. Copper prices and markets also had another bounce yesterday.
Tax watch 2: yesterday we saw separate statements from small miners, one of which involved a foreign investor, another Andrew Forrest, and a third an iron ore miner with a Chinese shareholder. All were positive and showed that mining exploration and development is continuing, despite what you might hear from the thick end of town (aka Rio Tinto) or its various mouthpieces in the commentariat. For instance, Thai group Banpu has upped its holding in NSW coal miner Centennial Coal to just on 20% with the purchase of another 5%. So far Banpu has spent about $300 million building its stake in Centennial. Foreign capital strike anyone?
Tax watch 3: then there’s the Twiggy-chaired Poseidon, once the high-flying leader of the mining boom circa 1968-72, now fallen on harder times. But it says it has found seven interest areas for further exploration for nickel sulphides at its Windarra prospect in WA. Poseidon management was in China in May looking for money from banks, just after Twiggy Forrest claimed the tax would see the Chinese swoop on Australian resource assets. Twiggy is quick to see Reds in the rocks. But Poseidon yesterday said that it had received a $150,000 grant by the WA government and its Department of Mines and Petroleum as part of the department’s Exploration Incentive Scheme co-funding program. Now is Twiggy a billionaire or isn’t he, but I would have thought he could have slipped his hand into his pocket for a lazy $150K for Poseidon. Fancy a company chaired by a billionaire getting a bit of corporate welfare from a government, and a Liberal party one at that.
Tax watch 4: and Atlas Iron yesterday revealed a new discovery near its Wodgina mine in Western Australia. Its shares jumped more than 10% on the news. Its partner is Chinese giant Ansteel. Both have expressed unhappiness with the tax, but have avoided the grandstanding by the bigger BHP, Rio, Twiggy Forrest, OneSteel and Clive Palmer, and gone on with their exploration and development work. The company said the discovery, dubbed ”Hercules”, was a new direct shipping grade iron ore prospect 110 kilometres south of Port Hedland. Atlas said Hercules is three kilometres from Atlas’ mine infrastructure and has achieved grades as high as 59.5% iron at 52 metres from the surface. ”Clearly there is an opportunity to generate significant value and mine life from these types of discoveries,” Atlas managing director David Flanagan said. “Atlas remains on track to achieve iron ore exports at a combined rate of six million tonnes per annum from its Pardoo and Wodgina operations by December 2010.”
Euro watch: consumer prices in the 16-nation eurozone were up an annual 1.6% in May, unchanged from April’s yearly rate. They rose just 0.1% in May from April, so no inflation worries there. The rise was unchanged from the flash estimate at the end of May.
UK watch: six days away from the UK Budget and a reported £34 billion in cuts, news that British unemployment had edged up to 7.9% in May from 7.8% the month before. While there was some small cheers for a 31,000 drop in the number of people receiving benefits, the number of people out of work rose 23,000 to 2.47 million in the three months to April. Remember that figure when assessing the size of the cuts next week and the damage they will do to the UK economy and jobs. Media reports say the former Labour government’s tax on bank bonuses will now raise an estimated $US2.5 billion and will cut second quarter earnings for some US and UK giants by 10% or more.